Advisors should rethink the way they offer their clients services – By Tessie Sanci

Implementing strategies that reduce your client’s tax liability and reduce their professional advice fees are just as valuable as investment returns, argues Scott Welch

By Tessie Sanci | June 15, 2016 14:45

The financial services sector is in a state of flux and financial advisors should adapt to disruptors such as the rise of robo-advisors and goal-oriented investors by rethinking their traditional ways of running their business, said Scott Welch, chief investment officer with New York-based Dynasty Financial Partners, during a discussion at the Investment Management Consultants Association’s annual conference in Toronto on Tuesday. One key element is redefining your measure of success, according to Welch: “Alpha always meant one thing and one thing only — excess performance for active management. I want to suggest to you as practitioner, not as an academic, that there is a broader definition of alpha. Alpha, at the advisory level, is anything that you do with respect to your clients’ portfolios that they find value in and are willing to pay for.”

This can include offering additional services, but it can also include strategies that succeed in reducing your client’s tax liability and fees for professional advice, according to Welch, who pointed out that lower fees and taxes means more money in clients’ pockets. “How is that not alpha to my client?” he asked the audience of advisors. One way to lower fees for clients is to incorporate a robo-advisor platform into a traditional advisory practice, said Welch. Robo-advisors are not direct competitors to traditional advisors, but they do have a distinct advantage over the latter group, according to Welch. “Digital advice platforms are not in the wealth-management business, they are startup technology companies and that’s how you have to think about them,” he explained. “Why does it matter? Because startup tech companies don’t have to make money, all they have to do is grow and then sell it to someone else who then has the problem of trying to figure out how to commercialize it.” Therefore, robo-advisors have the benefit of not having to produce a profit but still have the ability to put pressure on advisors’ fees, he added, and so advisors should be using them to build scale within their own business and lower their fees. Advisors must also understand the priorities of current investors, which are often different from those of advisors who have been taught the importance of optimizing the full portfolio in order to increase returns. Investors are now more interested in ensuring that they will have enough money to meet their personal objectives — even if that means segmenting a portfolio so some of the funds remain safe, said Welch. “What investors care about is, ‘Can I sleep at night?’, ‘Do I have the opportunity to get richer?’, and, ‘Am I keeping up with the Joneses?’,” said Welch. This focus on goals-based investing is an opportunity to talk to clients about why they have particular products in their portfolios as opposed to what the products are, he added.